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Settling up with Bank of America

This is a cross post with the Fordham Corporate Law Forum.

It is no secret that Bank of America (“BofA”) has faced numerous lawsuits concerning its role in the financial crises. From liability concerning bad mortgages to allegations of securities fraud, BofA’s reputation and bottom line has paid a high price for its actions. And the bad news just keeps coming.  Recently, important developments in two current cases involving Bank of America have the potential to end up costing the bank as much as $60 billion.

Court Certifies Class in Merrill Lynch Acquisition Case

In the summer of 2010, Bank of America shareholders filed a lawsuit against BofA alleging that executives failed to disclose and actively hid over $15 billion in losses at Merrill Lynch (“Merrill”).  BoA was worried that disclosure of such loses would dissuade BofA shareholders from voting for the bank’s acquisition of Merril. BofA announced the losses after the acquisition was successfully completed, and this announcement contributed to the bank’s stock falling more than 60 percent in two weeks.

The shareholders allege that BofA’s actions constituted fraud under Section 10(b) of the Securities and Exchange Act of 1934, as well as a violation of Section 14(a) proxy rules. The lawsuit seeks damages equal to the harm caused by the fraud, which the plaintiffs claim to be about $50 billion.

On February 6, 2012, the U.S. District Court for the Southern District of New York granted class certification to the plaintiff class of Bank of America shareholders. The court certified the class under Federal Rule of Civil Procedure 23(b)(3) meaning it is an opt-out class, which may pursue monetary damages. The court held that the plaintiffs were not required to prove their 14(a) claims on the merits in order to satisfy the predominance and superiority requirements of Rule 23(b)(3), finding that common questions did predominate over individual claims.

The SEC also sued BofA over the actions surrounding the Merrill acquisition, which the bank was able to settle for $150 million. Judge Rakoff called this settlement “half-baked justice at best.” This class certification means that Bank of America will almost certainly seek to settle here as well, considering the daunting alternative of going to court where potential damages could exceed $50 billion. The settlement in this case will dwarf that $150 million settlement with the SEC and will most likely leave BofA fully baked, if not burned.

Abusive Foreclosure Practices Settlement

Recently five of the country’s largest mortgage servicers, including Bank of America, agreed to a $25 billion settlement in connection with abusive foreclosure practices stemming from the collapse of the housing bubble. This was the largest federal-state civil settlement in the nation’s history and was in response to allegations that the banks used faulty documents to seize homes.

Of the banks included, Bank of America is responsible for the largest portion of the settlement. BofA has committed to paying $11.8 billion of the total $25 billion, including $3.24 billion in cash. The settlement agreement was specifically crafted to apply only to claims involving foreclosure abuses and not to prohibit further investigations into the packaging of mortgage-backed securities by the banks. The settlement does not release the banks from any criminal liability, private claims by individuals, or any class-action claims related to such securities. The New York and Delaware Attorney Generals stated that they will aggressively pursue further probes into mortgage-backed securities and pledged their commitment to holding guilty parties liable for their actions.

For Bank of America this means that, despite contributing nearly half of the recent settlement, their exposure to liability is far from over.

 

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